Charlatans and "Bull-oney" at the Fool?

If you work at Ben & Jerry's, a work perk is getting free ice cream. If you write for The Motley Fool, a work perk is getting some interesting email. For example, I recently heard from an irate reader, T.C. He had read an article of mine on compounding, called "Miraculous Math," and had found what I wrote hard to believe.

Permit me to now offer some of his words, along with my own commentary:

I just want to let you, and every other financial analyst out there that spouts what you just wrote about, know that it's complete BULL-ONEY!!! You will not be a millionaire simply by investing $1,000 in a stock or mutual fund or index fund based on an average market return rate of 10% a year.

Well, I beg to differ. It's certainly not a guaranteed result, since no one knows exactly how the stock market will perform from year to year. But over many decades, it has averaged growth of about 10% per year. If you do get that return, $1,000 would grow into $1 million in just 73 years. Heck, even if you only average 3% growth, $1,000 will still turn into $1 million -- it'll just take longer (more like 234 years).

Stocks are not cash
What you and your charlatans fail to explain, or conveniently choose not to, is that a stock is not cash. A 10% gain in a year for $1,000 cash leaves you with $1,100 cash; then 10% the next year is $1,210 cash. So on and so forth. When you own a stock or fund, you only own ONE stock or ONE fund; a 10% return does not give you 1.01 stocks at the end of the year or 1,100 funds; whatever money you make, you make on the value of the fund itself, unlike actual cash.

I'm not sure where we "charlatans" differ with him on this. It's true that wealth growing in stocks doesn't show up as a constantly growing pile of cash in your bank account. But as he seems to concede, your investment has value on its own, and that's what would be growing over time (though not in a straight line -- the stock market's ascent has always been lumpy and bumpy).

So your 10% annual return for 10 years is in actuality a 259% return! . That is completely unrealistic to expect for 10 years in a fund or stock. Stop spreading this nonsense and explain THE REAL TRUTH, not this fallacy!!!

It's true that many companies and funds won't deliver average annual gains of 10% or more over a decade, but there are many that will. I listed some funds with outstanding records in "Double Your Money With Funds." It lists some mutual funds with 10-year averages of 15%, 18%, and more. Below is a list of some well-known companies and their stocks' 10- and 20-year growth rates.

The main trick is finding the right stocks and funds and knowing when to buy and when to sell. The table above shows that some well-regarded, well-known companies can do quite well over long periods -- but that some can have decades when they don't do so well, too.

If picking the right individual investments seems too daunting a task, there's always the option of simple market index funds, which will deliver the market's growth and demand little of your brainpower. You might also take advantage of one of our investing newsletters, which regularly deliver researched good ideas and recommend points at which to buy and later sell. Here -- try our Stock Advisor newsletter for free and see for yourself. Its record is rather strong.

Interest vs. stocks
To be fair, the reader who emailed me had another point he thought I should have made more clearly -- that no one should expect stocks and funds to keep rising regularly, with little chance of falling. That's a good point. When cash compounds in a savings account, it's much more of a sure thing than wealth growing in stocks. You take on more risk with stocks, but if you invest responsibly, you stand a good chance of being rewarded with higher returns than banks can offer. And in an age when most of us need to be stockpiling wealth for retirement, that's rather valuable.

Disney is a Stock Advisor recommendation. JPMorgan Chase and Sara Lee are Motley Fool Income Investor picks. You can try any of our investing newsletter services free for 30 days.

Selena Maranjian owns shares of no company mentioned in this article. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.